IDBI may be allowed to merge with pvt bank after stake sale by Centre, LIC

The conditions for the strategic divestment of IDBI Bank could facilitate its merger with other financial entities, including commercial banks, which might be looking to lap up a stake in the lender, said an official.

The Centre is yet to come out with the preliminary information memorandum that would include eligibility conditions for the sale of IDBI Bank. However, Business Standard has learnt that the criteria may allow banks to place bids subject to a merger plan approved by the Reserve Bank of India (RBI).  

The merger may be subsequent to the stake sale in the lender. This implies that the amalgamation could be allowed after the approval of the sale of stakes owned by the government and Life Insurance Corporation of India (LIC). The Centre presently owns 45.48 per cent in IDBI Bank, while LIC holds a 49.24 per cent stake.

Promoters or promoter entities of banks who wish to buy a stake in the lender may have to submit their bids after the approval of the merger plan, as the RBI does not allow one promoter to own two banks, the official said.

Merging with a financial entity is unlikely to be allowed as the first step of the process or as a means of divestment due to complexities that may arise with regard to a secondary sale and valuations. Such an arrangement would mean the Centre getting shares of the merged entity which it would again have to divest.

The government sees banks and large non-banking financial companies as the most suitable contenders to participate in the sale of IDBI Bank. 

In the case of NBFCs looking to participate in the process and subsequently merge with the lender, there could be a requirement for creating a non-operative financial holding company (NOFHC) according to the extant guidelines of the RBI. Presently, an NOFHC is necessary for a licence to be issued for universal banks in cases where individual promoters have other group entities. 

The structure and eligibility criteria would be discussed with the RBI soon, before coming out with the preliminary information memorandum and formally inviting bids. 

IN THE WORKS 

• Bank promoters may be able to submit bids after approval of amalgamation plan
• Direct merger with a financial entity unlikely to be allowed due to complexities regarding secondary sale and valuation
• Eligibility criteria to be discussed with RBI soon; only shortlisted bidders may be vetted by central bank
• EoI likely to be floated by month-end

For private equity and other investors, bidding through a consortium may be allowed subject to meeting the eligibility criteria. The eligibility criteria, expected to be in line with the RBI’s ‘fit and proper’ criteria, would soon be discussed with the central bank. At first, interested bidders would be screened based on this criteria -- to be laid out in consultation with the RBI; the shortlisted candidates would be vetted by the central bank.

The government is aiming to float its expression of interest (EoI) document for the strategic divestment of IDBI Bank by June-end, and has recently concluded its road shows in the United States. A delegation of top government officials, including Department of Financial Services (DFS) Secretary Sanjay Malhotra and Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey, and LIC Chairman M R Kumar met US-based investors during June 1-3. The feedback received from investors will be discussed with the RBI to structure the contours of the transaction.

As of now, a decision has been taken not to grant any special dispensation to the new buyer, and to cap voting rights at 26 per cent, even if the investor picks up 50 per cent or more stake.